I saw an interesting question about the configuration of mid-1980s (pre-PS/2) IBM PCs on a vintage computer forum this week. The question regarded how various machines came from the factory, especially when some collectors have PCs they bought from the original owners, including an invoice, showing the machine didn’t match known factory configurations. This made me think of the gray market.

The gray market referred to the practice of discounters getting genuine IBM PCs and reselling them, sometimes modified. The most famous gray marketer was Michael Dell–the “Dell” in Dell Computer Corporation–who got his start by upgrading bare-bones IBM PCs and selling them out of his dorm room and later, out of a condo. Eventually he decided he wanted a steadier supply, and started manufacturing, becoming the company we know today.

But Dell was far from the only one.

Why the gray market existed

The market in the 1980s was very different from how it was today, and those conditions practically encouraged the gray market. Supplies of computers and peripherals tended to be fairly limited, and the whims of the consumer market were hard to predict. A particular item could become popular for no foreseeable reason, and dealers would run out of stock.

Large dealers turned to over-ordering in hopes of ensuring adequate supplies, and if they ended up getting more machines than they could sell in a reasonable length of time, they flipped them to the discount houses, who went on to sell the machines at much less than retail price. IBM in particular frowned on this practice. If they found a dealer dumping inventory to a discounter, they would take away their franchise. And when an end-user bought a gray-market machine, IBM wouldn’t honor the warranty.

The allure of the gray market

But the discount was high enough to be very tempting. In the October 28, 1985 issue of Time, the article “Inside the Gray Market” cited a New York-based discounter who sold IBM PC/XTs at two prices: $3195 or $2295. The two models were identical, but the $2295 model was gray market. It had no warranty from IBM; the discounter itself provided support.

Unlike today, the markup on IBM PCs in the 1980s was tremendous and problems were rare. In the event of an issue, most of the chips on the motherboard were replaceable. That meant defective machines could be repaired inexpensively, often by swapping out an individual chip that cost $10 or less. So the discount house was taking a risk by offering a warranty, but it was a slight one. The purchaser was taking a risk on the quality of support, but the machines were simple and reliable enough that there was a chance they’d never have to use the support.

IBM frowned on the practice–it had a reputation to uphold–but unless someone was doing something illegal, they couldn’t really stop it. In the Dec 2, 1985 issue of Infoworld, in an article titled “Outlets Unruffled by IBM Retail Cap,” one of the gray market dealers said he thought IBM talked tough but didn’t really mind the gray market sales all that much. And that makes sense. IBM needed to protect its dealers, but when consumers bought gray-market IBM PCs, they weren’t buying Apples or Commodores and they weren’t buying a PC clone, either. It would make sense for IBM to prefer that a consumer buy a gray-market PC rather than a machine from somebody else.

Gray-market modifications

Gray market PCs ended up in ads from discounters like this one, offering almost any custom configuration you might want.

Some gray marketers just sold machines as-is, but others would modify the machines. Dell may have been the first one to do it in huge volumes, but they probably weren’t the first and definitely weren’t the last. By mixing and matching hardware–especially mixing in aftermarket components–it was possible to match high-end IBM factory configurations while significantly beating the price. Or they could offer configurations IBM didn’t, either making the machine less powerful to hit an even more attractive price point, or making the machine more powerful than what IBM was selling.

So when an IBM PC/XT-286 shows up with an IBM-labeled 360K floppy drive rather than the 1.2 MB floppy drive that IBM officially offered, and the original owner provides an invoice that shows the machine came that way when purchased, I would suspect the machine went through the gray market. Imagine this scenario: A gray market retailer has some IBM PCs and PC/XT-286s in stock. The dealer removes one of the floppy drives from the IBM PCs and installs a hard drive and a multifunction card to make it functionally similar to a PC/XT, but cheaper. The dealer then swaps the 1.2 MB floppy drive from a PC/XT-286 with the 360K drive, allowing him to sell that PC/XT-286 for a couple hundred less than a factory configuration. Some users wouldn’t notice and others might not care.

What to do with the excess 1.2 MB floppy drives? Configure some dual-drive PC/XT-286s and sell them at a premium, though probably still less than the price of a factory-configured model from an authorized dealer.

Who bought from the gray market

Big companies wouldn’t buy IBM PCs from gray market dealers, but people buying computers for their own home use would. To a company, the potential lack of support wasn’t worth $900. But to private individuals spending their own money, the 30% savings by buying a gray market PC was probably irresistible. Visitors to the home had no way of knowing whether the machine came from Computerland or from a discounter. All they noticed was the prestigious IBM name on the computer in the corner.

What happened to the gray market

Clones eventually killed the gray market, at least as far as computers go. Flipping through old computer magazines, you could see outfits selling gray-market IBM PCs for 30% off, but they’d have brand-name clones for half that price, and no-name clones for even less than that. IBM tried everything, but eventually had no choice but to lower prices. By the time I was selling computers in the mid 1990s, I’d get phone calls inquiring about my cheapest computer not made by Packard Bell. Usually that computer would be an Acer, but there were times it was an IBM. Sometimes people were flabbergasted that I could sell them an actual IBM for less than a clone. Eventually the margins got too thin for IBM and IBM bailed.

And the margins sure aren’t what they used to be. They were thin even in the 1990s, and they’re worse now. That’s why pretty much everyone prices their computers about the same, even mail-order houses and members-only warehouse stores. It’s also why USB cables retail for $15 or $19. Stores don’t mind making a scant $25 on a computer if they can sell you $100 worth of cables with it and make $90 on the cables.

And with $25 markups and most manufacturers offering a build to order option where you can choose everything from CPU speed and hard drive capacity to the color of the case, there’s no room for gray marketers anymore.